U.S. House Set to Vote for First Standalone Crypto Market Structure Bill

The Financial Innovation and Technology Act of the 21st Century, proposed by representatives from the House Financial Services and Agriculture Committees, is set for a vote in the late afternoon on Wednesday. It’s anticipated that this legislation will secure a majority approval from both Democratic and Republican legislators.

The proposed legislation, named FIT21, empowers the U.S. Commodity Futures Trading Commission (CFTC) to take on more responsibility for overseeing digital assets classified as commodities in the spot market. Additionally, it establishes new boundaries for the Securities and Exchange Commission (SEC) in relation to these assets. This legislation provides a clear framework enabling crypto companies and digital asset issuers to identify whether their assets fall under the definition of securities, thereby determining which regulatory body will oversee them primarily.

Rep. Patrick McHenry (R-N.C.), head of the Financial Services Committee, expressed his desire for a significant vote on digital asset legislation among representatives this week. This comes a week after the Senate passed a resolution reversing Securities and Exchange Commission (SEC) accounting rules with House approval.

As a researcher studying current events, I can tell you that the bill is predicted to be approved in the House of Representatives with a small group of Democrats joining forces with most Republicans to cast their votes in its favor. The situation in the Senate, however, remains uncertain. Earlier in the day on Wednesday, the White House expressed opposition to this legislation, although President Joe Biden himself did not issue a veto threat.

For and against

The bill has been the subject of a large amount of discussion in recent days.

Rep. Jim Himes (D-Conn.) expressed eagerness to collaborate with his Financial Services Committee colleagues on overseeing the related matter further.

He stated, “FIT21 marks significant progress in the oversight of the cryptocurrency sector and represents a substantial enhancement over existing conditions.”

Rep. Ro Khanna (D-Calif.) expressed his intention to support the bill just prior to the vote on Wednesday, stating, “It’s essential that we foster blockchain innovation within the United States.”

Rep. French Hill (R-Ark.) explained to journalists on Tuesday that the proposed legislation establishes a five-part criteria for determining if a technology qualifies as a decentralized blockchain, and provides a regulatory guide for implementing this assessment.

He testified before the House Rules Committee that the legislators responsible for drafting the bill had collaborated with regulatory bodies such as the SEC for over a year. They integrated the regulatory input into the legislation during this timeframe.

As an analyst, I would express it this way: “I ensured the implementation of safeguards to prevent potential conflicts of interest. Intermediaries were mandated to meet stringent capital and other essential conditions. Moreover, I established more rigorous custody standards.”

As a researcher studying the process of company registration, I came across an intermediate step where organizations are required to submit a “notice of intent to register” to the relevant agencies prior to completing the registration procedure.

Opposition to the bill, however, starts within the House Financial Services Committee itself.

I, Rep. Maxine Waters (D-Calif.), have strongly criticized the recent deregulatory bill, referring to it as the “not fit for purpose act.” In my opinion, this legislation is among the worst I have encountered in my long career, posing significant harm to various regulatory frameworks. I draw a parallel between this bill and the Commodity Futures Modernization Act (CFMA), which I argue deregulated certain derivative products that ultimately contributed to the collapse of AIG and the subsequent economic crisis.

The FIT21 Act does not expand the CFTC’s power to tackle fraud or other illicit activities, contrary to popular belief. Instead, it tasks the agency with supervising digital commodities. Moreover, a clause in the bill causes disclosure requirements to expire after 180 days, which implies that the regulatory body cannot compel regulated entities to submit audited financial statements beyond this timeframe.

As an analyst, I’d point out that the definition of “investment contract assets” in the bill poses a significant challenge. If securities fall under this category, they will effectively leave the regulatory framework with no primary regulator and minimal laws and regulations. It is essential to note that this definition isn’t exclusive to crypto; both digital and traditional securities can be structured to fit this definition.

Interest groups weigh in

A collection of labor unions, consumer advocacy groups, scholars, and other entities penned a public missive to House Speaker Michael Johnson (R-LA) and Minority Leader Hakeem Jeffries (D-NY), urging them to oppose the bill and airing grievances reminiscent of those expressed by Gensler.

In a critique aimed at the industry as a whole, the letter pointed out that cryptocurrencies have yet to convincingly show practical applications beyond mere investment speculation. It also highlighted the numerous bankruptcies and legal battles currently underway within the crypto sphere.

The industry appears to have bounced back this year, but it’s important to note that this recovery is partly due to the contentious approval of Bitcoin ETPs by the Securities Exchange Commission. however, beneath the surface, issues such as scams, hacks, theft, instability, reckless promotional activities, and regulatory evasion continue to plague the crypto industry as they did during the previous bull market.

Over thirty organizations, among which are the AFL-CIO, Americans for Financial Reform, the Revolving Door Project, and the National Consumer Law Center, along with ten individuals, collectively signed the letter.

As a researcher studying the recent legislative proposal regarding cryptocurrencies, I share the concerns raised by various groups that the bill might weaken existing securities laws. By attaching themselves to decentralized networks or merely declaring such affiliation, non-crypto companies could potentially evade stricter regulatory oversight. Although the Commodity Futures Trading Commission (CFTC) is granted more power under this bill, the letter argues that the authority is ambiguous, which might undermine other regulatory bodies like the Consumer Financial Protection Bureau.

As a crypto investor, I can tell you that the proposed legislation, in my opinion, contains a remedy that could potentially cause more damage than the issue it aims to resolve. This harmful impact would extend not only to the crypto industry but also beyond its borders.

Supporters of the bill believe that enacting this legislation will aid companies in enhancing both their financial systems and the internet.

“The Bitcoin network was launched in 2009, marking the beginning of the blockchain and digital asset industry. However, there has been a lack of specific regulations targeting this sector. Consequently, companies operating within this space face confusion, while users and consumers are left without adequate protection.”

A signed letter from organizations like Circle, ConsenSys, Digital Currency Group, Kraken, and over fifty other businesses in the cryptocurrency industry expressed concern. They warned that the absence of clear regulations in the United States could hinder progress and potentially cause the country to fall behind in the global technological advancement related to this sector.

On Wednesday, SEC Chair Gary Gensler issued a statement voicing his opposition to the proposed legislation. He warned of the risks associated with cryptocurrencies, including their collapses and instances of fraud. He also expressed concern that this bill could potentially enable traditional manipulators, such as pump and dumpers or penny stock pushers, to evade regulatory scrutiny by falsely claiming they operate through decentralized networks.

He advocated for prioritizing the safety of investors over making it easier for noncompliant businesses to operate within the policy framework.